- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 18-2001 (1st Circuit, Oct 29,2019) Published
- Tag(s):
-
- Ruling:
- The Court of Appeals rejected the PIEC's challenge to the bankruptcy court's conclusion that their attempt to assert unjust enrichment claims is an attempt to exercise "control" over the Avoidance Actions, and thus the property of the estate, in violation of the automatic stay.
- Procedural context:
- The Plaintiffs'Interim Executive Committee (PIEC) appeals from bankruptcy court orders adopted by the district court arising out of the bankruptcies of TelexFree, LLC; TelexFree, Inc.; and TelexFree Financial, Inc. (collectively, "TelexFree"), one of the largest Ponzi/pyramid schemes in U.S. history. The dispute in this case is over who will be allowed to seek to recover payments made by new participants in the scheme to the existing participants who recruited them (the "Contested Funds"). The Trustee is attempting to recoup these Contested Funds through avoidance actions, while victims represented by "PIEC" are asserting unjust enrichment claims to recover the same sums.
The Trustee sought and received two initial rulings from the bankruptcy court: (1) that TelexFree was a Ponzi and pyramid scheme, and (2) that a "net equity formula" should be used to calculate TelexFree victims' potential claims. The net equity formula, which the bankruptcy court approved on January 26, 2016, divides TelexFree participants into groups of "Net Winners" and "Net Losers." Only Net Losers will be creditors in the TelexFree bankruptcy cases.then he filed two avoidance class actions in the bankruptcy proceedings against groups of foreign and domestic Net Winners, respectively, seeking to use preferential or fraudulent transfer theories under 11 U.S.C. §§ 547 and 548 (collectively, "Avoidance Actions"). Any recovery from these class actions will be ratably distributed to all Net Losers.
Putative classes of TelexFree victims, coordinated by PIEC, separately, had initiated lawsuits against financial institutions, lawyers, leaders of the TelexFree scheme, and others. Many of these lawsuits have been consolidated into multidistrict litigation ("MDL") pending in the U.S. District Court for the District of Massachusetts. Darr did not initially object to these PIEC lawsuits, but did when two putative classes of Net Losers, led by Rita Dos Santos, Maria Murdoch, Elisangela Oliveira, and others (collectively, the "Defendants"), brought claims for unjust enrichment against the Net Winners of the scheme, also seeking to recover the Contested Funds.
The Trustee filed an adversary proceeding to enjoin the PIEC Defendants, individually and as putative class representatives, from pursuing their unjust enrichment claims against the Net Winners. He argued that such a claim is an improper attempt to "control" property of the TelexFree estates in violation of the automatic stay imposed in bankruptcy proceedings by § 362(a) of the Bankruptcy Code. The U.S. District Court for the District of Massachusetts withdrew the reference of the adversary proceeding to the bankruptcy court but returned the proceeding to the bankruptcy court to draft "proposed findings of fact and conclusions of law."
The bankruptcy court, on December 18, 2017, found that the Trustee, in his capacity as trustee of the TelexFree estates, has the requisite property interest under 11 U.S.C. §§ 547 and 548, rejecting PIEC's argument that the criminal nature of TelexFree's "business" and TelexFree's lack of actual possession of the funds meant the trustee lacked standing to bring the Avoidance Actions. The court also found the Defendants' unjust enrichment claims are derivative of trustee's Avoidance Actions and barred by the automatic stay provision of the Bankruptcy Code. See 11 U.S.C. § 362(a)(3). The district court adopted the bankruptcy court's proposed findings and entered summary judgment for the trustee, including as to the injunctive relief.
- Facts:
- TelexFree was a hybrid Ponzi and pyramid scheme that operated in the United States from 2012 until 2014 when its founders were criminally charged, its operations closed, and it declared bankruptcy. TelexFree held itself out as a multi-level marketing company that sold international phone subscription packages. Participants paid membership fees to join the TelexFree scheme and have the right to sell phone subscription packages to others.operations, rather, were geared towards recruiting new participants into the scheme. New participants, on signing up, owed a membership fee to TelexFree. Instead of paying TelexFree, new participants could pay the existing members directly, and the existing members could redeem some accumulated "credits" to settle the new members' obligations to TelexFree. New participants, then themselves often recruited additional participants into the scheme. Participants who joined early in the scheme could make significant money from all the "downstream" participants, while many newer participants lost money, sometimes their entire life savings. The Contested Funds at issue relate to the signing up of new participants. The trustee characterizes this series of transactions as a single "triangular transaction." He argues that the payments made by the new participants to the recruiting participants were integral to the economics of the TelexFree scheme and are best understood as an indirect way for the new participants to pay TelexFree membership fees and TelexFree simultaneously to pay the recruiting participants for their accumulated credits. The bankruptcy and district courts adopted the trustee's characterization. The "victims" Plaintiffs'Interim Executive Committee (PIEC) represents who want to exercise their "personal rights" against recruiters who "pocketed their hard-earned savings" were the persons harmed, not TelexFree. PIEC wants to recover the Contested Funds through its unjust enrichment claims, but it does not say it will prove its claims on an individual-by-individual basis. Rather, it seeks to prove its claims by reference to the fraudulent scheme.
- Judge(s):
- Lynch, Selya and Barron
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